Johnson & Johnson and United Healthcare Face a Series of Obstacles

Recapping a big day of earnings for both names.

As earnings season continues, here are two big names to take note of that reported on Tuesday.

Johnson & Johnson

Johnson & Johnson (JNJ) has certainly had easier times in terms of appeasing the market. The time-tested stalwart of many portfolios has had a bit of stagnation, and higher costs due in large part to legal costs related to lawsuits over its talc powder. The company also spent roughly $400 million in settlements related to Xarelto, a blood thinner. The problems created a quarter with decreases in earnings, but the company also had flat revenues.

JNJ reported sales of $20.02 billion. Compared to 2018's $20.01 billion, it marks a 0.1% increase year over year. That's not exactly robust growth. On those sales, net earnings declined 14.2% to $3.75 billion. On a diluted basis, that breaks down to $1.39 per share. Compared to 2018's $1.60 per share, that's a 13.1% decline. On an adjusted basis, JNJ reported earnings of $5.66 billion, which represents a 0.5% increase year over year. That income represents adjusted earnings of $2.10 per diluted share, a 1.9% increase over last year's $2.06 per share.

Johnson & Johnson doesn't give GAAP financial guidance due to too much uncertainty. On an adjusted basis it expects diluted earnings per share to increase 4.3%-5.5% to $8.53-$8.63. It's relatively unchanged from the guidance provided in January. Analyst estimates seem to put full-year earnings in that range with $8.58 per share. If the company hits those levels, the stock is currently trading at roughly 16.22x forward earnings. That's not a bad valuation as long as the legal battles don't intensify.

I do have concerns about how long lawsuits may last stemming from the problems surrounding baby talc powder. Overall, I think I view JNJ as a "hold" at present.

UnitedHealth Group

UnitedHealth Group (UNH) was one of my power plays for 2019. Unfortunately, I think I was mistaken. The company actually beat earnings expectations this morning, but the stock was down despite the news.

I said last week that I believe health insurance stocks like UnitedHealth will suffer this year due to fears over the rising Democratic push for some form of universal healthcare as part of candidates' presidential campaigns.

Were Bernie Sanders to win the presidency, for example, I remain skeptical that something like this could be achieved. Expanding federal healthcare sounds like it would be just as difficult as when the Republicans attempted to repeal the Affordable Care Act. Nevertheless, I certainly don't want to gamble on the idea.

It's unclear how the dealings of a name like UnitedHealth would be affected by "Medicare for all." That uncertainty creates fear. Fear is not good for stocks.

UNH reported revenues of $60.3 billion in the first quarter. That's a 9% growth rate year over year. Net earnings were $3.56 billion. That's a 22.2% increase year over year. On a diluted basis, that income breaks down to earnings of $3.56 per share. That's a 24% increase. That's what makes UNH's stock performance so difficult to gauge. The company is doing well. There are just so many attributes to consider when looking at it as an investment.

The company does have over $34 billion in long term debt, though the balance sheet is still solid thanks in large part to over $15.7 billion in cash/equivalents. Still, you have to wonder how all of that would be affected if they were suddenly on the wrong side of a universal healthcare program.

UnitedHealth upped its full-year guidance thanks to the strong first quarter. The company now expects net earnings of $13.80 to $14.05 per share. If that guidance is accurate, the stock is trading conservatively at around 16.13x expected full-year earnings. That's not a bad price in my book, but I think the mounting fear over healthcare uncertainty is going to hold this thing down. It's a justifiable fear. One cannot predict right now what a fully controlled Democrat Congress and White House would do to our healthcare system. Again, I think the odds of the votes being there are slim, but it could happen.

To that end, I almost think that UNH will spend the rest of 2019 and the large part of 2020 having its financial performance overshadowed by campaign polls. I'd rate it as a very conservative "hold."

(UnitedHealth and Johnson & Johnson are holdings in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells these stocks? Learn more now.)

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At the time of publication, Dave Butler had no position in the securities mentioned.

There's little in the report or technical picture that makes me want to rush into FL.

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